Some readers, helpfully, pointed our attention to the $10.8 billion Alerian MLP exchange traded fund, which has a lower distribution than the closed-end funds, though is diversified and has lower expenses.

So let’s take a look at the Alerian MLP ETF
AMLP, -0.28%
which is managed by ALPS Advisors and designed to track the performance of the Alerian MLP Index
AMZ, -0.41%
The index represents about 85% of the publicly traded market value of energy limited partnerships (also know as master limited partnerships, or MLPs).

The Alerian MLP ETF has a distribution yield of 7.49%. That’s why investors are attracted to master limited partnerships: massive income. In comparison, 10-year Treasury notes
TMUBMUSD10Y, +0.75%
yield about 2.4%, and the S&P 500 Index
SPX, -1.54%
of the largest U.S. stocks yields a weighted average of 2.02%. In other words, a $1 million investment in the Alerian MLP ETF could be expected to give you annual distributions of $74,900, based on the current share price. Its annual management fee is 0.85% of assets. The current prospectus also includes 0.57% held for deferred taxes, which brings the total expense ratio to 1.42%.

Getting back to the previous article about MLP funds, some readers were dismayed at their poor total returns over the past several years. It’s important to understand two important points before considering an investment in any MLP or any fund that invests in them:

• The primary objective is current income. The share prices or unit prices (for the partnerships themselves) can rise over time as income payouts increase or if oil or natural gas production increase, but you should not be looking at these as long-term growth investments to compare against the S&P 500, for example.

• The share price of any fund that invests in MLPs will fluctuate tremendously if the oil market goes through a boom or a bust. This chart tracks the prices of West Texas crude oil and the Alerian MLP Index over the past 10 years:
AMLP, -0.28%

FactSe

You can see the two big drops for oil, and the MLPs, during the financial crisis of 2008 and the oil-price shock that began in July 2014. OPEC nations decided to “go for broke” by increasing production in an attempt to eliminate new competition from U.S. shale oil producers, which faced much higher production costs. But you can see there has been quite a price recovery. Meanwhile, U.S. shale producers continue to improve their efficiency at a rapid pace, as described by Mark P. Mills in the Wall Street Journal.

Looking again at the chart, the MLPs’ prices dropped faster than the price of oil, because investors anticipated U.S. producers would cut production, which would mean lower pipeline volume and lower earnings for the MLPs. That is exactly what happened, but many industry watchers expect demand and production to rise for the next few years. And if oil can remain around $50 a barrel, less than half of where it was in the summer of 2014, the improved efficiency among producers means profits, more production and much more money to be made by the MLPs.

If you’re looking for income and believe oil isn’t set for another major decline, and that we’re still in the middle of a market recovery for oil and MLPs, then this is a good time to consider the Alerian MLP ETF. If you buy the ETF, you will have to be patient, but you can take solace in the fact that you will receive high income. If your objective is steady long-term growth, then this type of investment is not for you.

Here are the top 10 holdings of the Alerian MLP ETF, by portfolio weight, as of the close on March 30:

Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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